Crowdfunding: Getting ready for take-off

It makes no sense to insufficiently capitalise a venture. And there’s no doubt that that managing the capital runway is one of the biggest challenges faced by entrepreneurs in an early stage venture. It’s certainly a key issue any early stage investor needs to manage as well.

The capital runway for a venture can be likened to a plane taking off.

Imagine a runway set on a coastal cliff. The venture is the plane - you pull it back from the cliff and get it ready for take-off. The plane gathers speed but instead of launching at the end of the runway, it just falls off the cliff.

Using another analogy, capital raising is like a relay marathon. Every 10km needs to be properly capitalised, with sufficient resources remaining to get through the next 10km. And you need to think carefully where and when you will target the baton exchange. Structuring the marathon properly not only mitigates the risk of your investment falling off a cliff, it can also create an event to increase its value.

Managing the Capital Runway

Perth Angels provides early stage funding to a number of ventures who then, in managing their capital runway, will raise funds through a number of means – one growing in popularity is crowdfunding.

These two asset classes - angel investing and crowdfunding - have a symbiotic relationship in funding early stage ventures.

A case in point is Urbotanica, a business helping people grow fresh herbs on their kitchen bench. Urbotanica’s UrbiPod is an innovative home appliance designed and made in WA and is the ultimate starter kit that includes all you need to successfully grow your own fresh produce – delicious herbs, flowering plants and more - all year round.

Another example of extending the runway through crowdfunding is Rhinohide, a start-up that makes body armour for four-wheel drives, who raised its initial funding from Perth Angels and then went on to be successful on hit reality TV show Shark Tank.

“We are picking up major momentum as we scale at pace and break into new markets such as the USA and Asia and the Middle East,” he said.

“We carved out a great position within the marketplace having a product which is not only easier to install than our competitors but also protects your car better.”

Rafael Kimberley-Bowen is an active investor through both Perth Angels and through various crowdfunding platforms in Australia and overseas and has run crowdfunding campaigns for multiple businesses through boutique advisory firm Scale Partners.

“Equity crowdfunding involves issuing backers with shares in the company and was introduced through legislation in Australia last year. It’s commonly referred to as CSF and is distinct from reward crowdfunding which involves pre-selling a product on platforms like Kickstarter.

CSF allows you to raise capital directly from retail investors, but on a smaller scale and with lower regulatory burden and cost than a traditional public offer. It differs from angel investing in that it tends to target the general retail investor audience rather than sophisticated investors, is a more passive investment and involves a lower minimum investment (can be as low as a couple of hundred dollars but capped at $10,000 per retail investor).

Selecting the right platform for your business is paramount, as they each have their own strengths and weaknesses. In some cases a retail investor base in Australia is the best fit, eg for a brewery seeking to gain new loyal customers as well as raise funds, in other cases a wholesale investor base in Singapore may make more sense for an Aussie business looking for strategic investors and an entry point into the south east Asian market.

The other challenge is setting the target raise amount right. Once the campaign goes live you can no longer change it, and if you fall short of your minimum target, the campaign closes and nothing is raised. Recently, the established online book retailer Booktopia got it dramatically wrong and had to abandon its campaign after having raised only $894,000 against an upper target of $10m. Lower targets are more likely to complete successfully and be over-subscribed, and you can then return to the market a year later and use the ‘fear of missing out’ effect to fuel interest in a second, larger round.”

Where do you find investment ready early stage ventures?

Western Australia certainly punches well above its weight in emerging tech with many exciting ventures in med tech, agribusiness, cyber security technologies and other industries, each presenting high-value growth opportunities to investors with an appetite for early stage risk.

Not all of them are ASX listed, but all can be invested in before they are capable of sustaining the value necessary in a listed environment.

The challenge for investors is how to find the right ones to invest in - ventures that are well-structured, properly capitalised and with the right capabilities and connections to make them successful.

Where to find them, have the time to filter, and select and structure them is hard by oneself.

Disciplined angel investing practices, as followed by groups such as Perth Angels and South West Angels, are great examples of how to leverage yours and others time, to find ventures of interest, manage the capital runway through co-investment, and access networks and connections to build the venture sufficient value to raise further capital at a capital uplift.